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8/4/2019 Barriers to Trade in Services in the CEFTA Region
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A W O R L D B A N K S T U D Y
Borko Handjiski
Lazar estovic
Barriers to Trade in
Services in theCEFTA Region
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W O R L D B A N K S T U D Y
Barriers to Trade in Servicesin the CEFTA RegionBorko HandjiskiLazar estovi
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2011 The International Bank for Reconstruction and Development / The World Bank1818 H Street NWWashington DC 20433Telephone: 202-473-1000Internet: www.worldbank.org
All rights reserved1 2 3 414 13 12 11
World Bank Studies are published to communicate the results of the Banks work to the developmentcommunity with the least possible delay. The manuscript of this paper therefore has not been preparedin accordance with the procedures appropriate to formally-edited texts. This volume is a product of thestaffof the International Bank for Reconstruction and Development / The World Bank. The findings, inter-pretations, and conclusions expressed in this volume do not necessarily reflect the views of the ExecutiveDirectors of The World Bank or the governments they represent.
The World Bank does not guarantee the accuracy of the data included in this work. The boundaries,colors, denominations, and other information shown on any map in this work do not imply any judge-ment on the part of The World Bank concerning the legal status of any territory or the endorsement oracceptance of such boundaries.
Rights and PermissionsThe material in this publication is copyrighted. Copying and/or transmiing portions or all of this workwithout permission may be a violation of applicable law. The International Bank for Reconstruction andDevelopment / The World Bank encourages dissemination of its work and will normally grant permissionto reproduce portions of the work promptly.
For permission to photocopy or reprint any part of this work, please send a request with completeinformation to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA;telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com.
All other queries on rights and licenses, including subsidiary rights, should be addressed to theOffice of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422;e-mail: [email protected].
ISBN: 978-0-8213-8799-3eISBN: 978-0-8213-8836-5DOI: 10.1596/978-0-8213-8799-3
Library of Congress Cataloging-in-Publication DataHandjiski, Borko, 1979- Barriers to trade in services in the CEFTA region / Borko Handjiski, Lazar estovic. p. cm. (World Bank study) Includes bibliographical references. ISBN 978-0-8213-8799-3 ISBN 978-0-8213-8836-5 (electronic)1. Service industriesCentral Europe. 2. Central European Free Trade Agreement (Organization) I.
etovic, Lazar. II. Title.HD9986.C362H36 2011
382'.50943dc23 2011020571
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iii
Table of ContentsAcknowledgments .....................................................................................................................v
Acronyms and Abbreviations ............................................................................................... vii
1. Introduction ............................................................................................................................ 1
2. Services and Trade in CEFTA Countries ........................................................................... 3
The Share of Services in the Economy .............................................................................. 3
Trends in Services Trade ....................................................................................................3
Significance of CEFTA Trade in Services ......................................................................... 4
The Structure of CEFTAs Services Exports ..................................................................... 6
Intra-CEFTA Trade in Services ..........................................................................................93. Barriers to Trade in Services by Sector ............................................................................ 15
General Market Access and Barriers ...............................................................................15
Moving toward the EU ................................................................................................. 18
Sectoral Barriers to Trade in Services .............................................................................19
Construction ....................................................................................................................... 19
Domestic Regulation and Cross-border Provision....................................................... 21
The View of Private Construction Firms...................................................................... 23
Transport ............................................................................................................................ 25
Road Transport ............................................................................................................. 26
Rail Transport .............................................................................................................. 27
Legal Services ..................................................................................................................... 28
ICT Services ........................................................................................................................ 30
4. Conclusions ........................................................................................................................... 35
Tables
Table 2.1Shares in the National Economy of the Top Four Sectors by Country ..............5Table 2.2Modes of Cross-Border Supply of Services ...........................................................6
Table 2.3Change in Exports of Goods and Services (Percent) ............................................8
Table 2.4Structure of Service Exports, 200709 Average (EUR, Million) ..........................9
Table 2.5Share of Exports within CEFTA in Total Exports, 2008 (Percent)..................... 11
Table 3.1Arbitrating Commercial Disputes .........................................................................17
Table 3.2Work Authorizations in CEFTA Countries ..........................................................18
Table 3.3Ease of Obtaining Construction Permits .............................................................. 22
Table 3.4Summary Table of Regulatory Approaches To Construction inCEFTA Countries ...............................................................................................................24
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Table 3.5Total Land Freight Transport (Ton-Km, Billions) ............................................... 25
Table 3.6Share of Road Transportation in Total Land Freight Transport (Percent) ......25
Table 3.7Logistics Performance Indicator ............................................................................26
Figures
Figure 2.1Average Share of Service Sectors in CEFTA Economies ....................................4
Figure 2.2Services Trade in CEFTA and the EU, 200709 average (Percent of GDP) .....7
Figure 2.3Exports of Goods and Services, 200709 Average (EUR) Million ..................... 8
Figure 2.4Net Trade in Services by Country, 200709 Average (EUR Million) .............10
Figure 2.5Trade in Services Within the CEFTA Region, 200709 Average,(EUR, Millions) ..................................................................................................................12
Figure 2.6Mirror Gap Trade Statistics for Croatia and Serbia, 2009 (EUR Million) ......13
Figure 3.1Time and Cost of Enforcing a Contract .............................................................. 16
Figure 3.2Ease of Leasing Land ............................................................................................ 23Figure 3.3Monthly Retail Price for 2 Mbps Broadband Internet Access 2010 (EUR) ....32
Boxes
Box 2.1Modes of Supply and Examples of Services .............................................................6
Box 2.2Quality of CEFTA Service Trade Statistics..............................................................13
Box 3.1The Experience of the EU .......................................................................................... 28
Box 3.2Expansion of Cross-Border Legal Services .............................................................30
Box 3.3Obligations to Protect IP Rights Arising from the CEFTA Agreement ..............32
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v
Acknowledgments
This report was prepared by Borko Handjiski and Lazar estovi(WorldBank). The
work is based on country background notes prepared by: Milena Manojlovic (Serbia),Milica Djedovic (Montenegro), Andrej Bolfek (Croatia), Dimitar Ristovski (Macedonia),Ervin Mete (Albania), Adelina Sokoli (Kosovo) and Femil Curt (Bosnia and Herzegov-ina). The report was reviewed by peer reviewers Renata Vitez (CEFTA Secretariat) andJuan Sebastian Saez (World Bank) and additional comments were received from MarinaWes. The authors would also like to thank Satu Kahkonen and Juan Sebastian Saez fortheir advice, as well as Country Economists from the region: Agim Demukaj, DamirCosic, Danijela Vukajlovic, Dusko Vasiljevic, Erjon Luci, Evgenij Najdov, Matija Lacofor their support. Colleagues from different sectors: Martin Humphreys, Carolina Mon-salve, Amitabha Mukherjee and Cem Dener provided us with valuable comments andinput. Finally, we are grateful to Mismake Galatis for organizing the publishing.
The work is partly funded by the Multi-Donor Trust Fund for Trade and Devel-opment, supported by the governments of Finland, Norway, Sweden, and the UnitedKingdom.
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Acronyms and AbbreviationsBiH Bosnia and Herzegovina
CEEC Central and Eastern European CountriesCEFTA Central European Free Trade AgreementDSL Digital subscriber lineEC European CommissionEU European UnionGATS General Agreement on Trade in ServicesGDP Gross domestic productGVA Gross value addedIP Intellectual propertyIRI Investment Reform IndexICT Information and communication technologyLPI Logistics Performance IndexSEE Southeast EuropeOECD Organization for Economic Co-operation and DevelopmentTRIMS Trade-related investment measuresWTO World Trade Organization
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1
1
Introduction
In the past decade the economic performance of the Central European Free TradeAgreement (CEFTA) countries1was solid, especially just before the global economiccrisis, which hit most CEFTA countries hard. Expansion of trade had contributed to
economic growth in most CEFTA countries even though trade, measured by the share of
the export of goods and services in total output, was lower than in many of the states that
joined the European Union (EU) in 2004 and 2007 (New Member States). The post-crisis
agenda in the CEFTA region has focused on how to make exports a greater component
of sustained growth. Although that would rely primarily on exports of goods, services
could also make a significant contribution, particularly through the indirect effect of
facilitating exchange of goods.
After the armed conflicts of the 1990s, later in that decade economies in Southeast
Europe (SEE) began to reintegrate their trade, signing 32 bilateral free trade agreements.2
In 2006, these bilateral agreements were replaced by a regional agreement, CEFTA. The
agreement, which entered into force in 2007, liberalized all trade in industrial goods and
most trade in agricultural goods. CEFTA Article 1 sets out the objective: to expand trade
in goods and servicesand foster investment by means of fair, clear, stable and predictablerules. Moreover, article 27 refers to trade in services and states that the Parties willgradu-
ally develop and broaden their co-operation with the aim of achieving a progressive liberalization
and mutual opening of their services markets,in the context of European integration, taking
into account the relevant provisions of the General Agreement on Trade in Services (GATS)
and commitments entered into under GATS by Parties being members of the World Trade
Organization. Although the agreement did not contain specific provisions on sectoral
liberalization of trade in services, article 29 allowed for negotiations to be launched with
the aim of achieving high liberalization of trade in services3. In addition, it commied
signatories to deepen market integration in the medium term with provisions on maers
related to trade in services, such as electronic commerce, intellectual property (IP) rights,public procurement, and investment.
Liberalization of services among the CEFTA countries intensified prior to the CEFTA
Agreement, in the context of various regional sectoral initiatives. Under the auspices
of the European Union, in 2006, the SEE countries, which include all CEFTA countries
except Moldova, joined the European Common Aviation Area and established a unified
Energy Community in SEE in line with EU energy legislation. Then, in 2008, the Coun-
cil of the European Union decided to open negotiation of a Transport Community Treaty
between the European Union and SEE countries, with the objective to initially promote
cooperation in this area among the SEE countries. Then, the Stabilization and Associa-
tion Agreement that these countries concluded with the EU as part of the EU accessionprocess, contained requirements on aligned domestic legislation with that of the EU in
several sectors (e.g. telecommunications and banking), which implied opening of the
domestic markets to foreign service providers.
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Reaping the benefits of a larger market often requires deep regional integration that
goes beyond trade in goods. Recent studies provide evidence of the positive effects on
economic growth, direct and indirect, of trade in services. Mishra et al. (2011) demonstrate
how the exports of services, and their sophistication, promote growth. Arnold et al. (2007,
2010) confirm the link between services policy and the productivity of manufacturingfirms that rely on services as inputs; they demonstrate, for the Czech Republic and India,
how deregulating service sectors increased the productivity of manufacturing firms. Inte-
grating goods and services markets would enable the small CEFTA economies to become
part of not only regional but also global supply chains and production networks, which in
turn would lower costs to consumers and make these economies more aractive to foreign
investment. Moreover, since regional integration is a prerequisite for joining the EU, open-
ing the regional services market would prepare CEFTA economies for functioning within
the EU single market.
This paper describes the economic importance of the service sector in CEFTA coun-
tries and current barriers to trade in services between CEFTA countries. It looks at foursectors: construction, land transport, legal services, and information and communication
technology (ICT) services. The intent is to stimulate dialogue on trade in services between
decision-makers in CEFTA countries.4
In CEFTA economies, export of services accounts for about 10 percent of GDP in non-
coastal countries and much more in coastal countries, where foreign currency earnings from
tourism are the dominant form of service exports. Though CEFTA countries have opened
their markets considerably, mostly because they are pursuing accession to the EU and the
World Trade Organization (WTO), there are still obstacles to trade in services. Some, such
as the movement of professional workers, are general; others are sector-specific.
In what follows, the next section illustrates the importance of the services sectors inCEFTA economies and analyzes trends in services trade and in intraregional trade for
countries that have such data available. The third section describes general barriers to
trade in services, and specific barriers for the four sectors specified. The analysis reviews
the legal and institutional framework for trade in services and features assessments by
regional companies that export such services. The final section summarizes the findings.
Notes
1. The CEFTA countries are Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Kosovo,
Moldova, Montenegro, Romania and Serbia. In the case of Kosovo, the CEFTA agreement was signed
by the United Nations Mission in Kosovo. Following the ratification, Kosovo proclaimed indepen-dence in February 2009.
2. The original CEFTA was signed in December 1992 by Czechoslovakia, Hungary and Poland. In 2006,
the countries of SEE including Bulgaria, Romania and Moldova signed the Agreement on amendment
and accession to CEFTA. In 2007 CEFTA entered into force for all signatories except Bulgaria and
Romania, which left CEFTA when they joined the EU on January 1, 2007.
3. Article 29: Thee Joint Commiee shall review on an annual basis the results of the co-operation
referred to in Article 27 and, if appropriate, recommend, following its rules of procedure, the launch-
ing of negotiations with the aim to achieve progressively a high level of liberalization in accordance
with Article V of GATS. The commitments undertaken further to such negotiations shall be set out in
schedules forming an integral part of this Agreement.
4. This analysis does not cover Moldova because its trade in services with the rest of the CEFTA
region is marginal, for both historical and geographic reasons. Also, since Moldova is not considered
to be aspiring to accession to the EU, the need to transpose EU legislation and prepare for becoming
part of a much larger open market is minimal.
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3
2
Services and Trade in CEFTA Countries
The Share of Services in the Economy
Services account for the largest share of the economy in all CEFTA countries, and theshare is increasing. On average, they account for more than two-thirds of gross valueadded (GVA) in the region. The shares of services in the economies of Albania, Bosnia andHerzegovina (BiH), Croatia, Kosovo, and Montenegro range from 71 to 77 percent of GVA.
The only country where services represent less than 60 percent of GVA is Serbia, though
the share there has been rising continuously for the past decade. In most countries, the ser-
vice sectors have been growing above the average economic growth rate. Exceptions are
Albania, Kosovo, and Montenegro, where the share of services, though high, has been flat.
In this respect CEFTA countries are thus close to where they are ranked in terms of GDP
per capitasomewhere between middle- and high-income countries. The share of ser-
vices in GDP1in middle-income countries averages about 53 percent and in high-income
countries about 73 percent (World Bank 2010c).
Nontradable
2
services dominate the economies of CEFTA countries, in most ofwhich wholesale and retail trade and real estate are the largest service sectors.3Whole-
sale and retail trade on average contributes about 15 percent to GVA, real estate and
other business services almost 12 percent, and construction about 8 percent (though
above 10 percent in Albania and Kosovo). Coverage of professional services is in general
weak; all these services are lumped together under other.
Which sectors are important varies by country. For Albania, the two most important
are trade (including hotels and restaurants) and construction, which together accounted
for 37.5 percent of GVA for 200709 (see Table 2.1). Over the same period, for BiH, trade
and real estate are most important, accounting for about 25 percent of GVA; in Croatia two
most important sectors are financial services (including real estate) and trade accounted
for about 35 percent of GVA. FYR Macedonia has a lesser concentration, with the two
most important sectors, trade and transport, accounting for less than 25 percent of GVA.
In Montenegro, trade and transport are most important, contributing about 27 percent of
GVA (though real estate follows by less than 1 percentage point). These two sectors con-
tributed to about 27 percent of the total GVA. In Serbia two most important sectorsreal
estate and trade accounted for 31.7 percent of GVA. Finally, for Kosovo, for 200507 (for
which data are available) the two most important sectors were real estate (including busi-
ness and professional services) and trade accounted for about 26.6 percent of the GVA.
Trends in Services Trade
International trade in services has been expanding continuously as technologies
advance and domestic markets open up. New information technologies, in both devel-
oped and developing countries have changed the processes for producing services and
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created new types of services. Some services can now be unbundled and produced
at different locations; others have become a final export for direct consumption
previously, services were an input of trade in goods (Mishra et al. 2011). As a result,
the production cycle has become segmented, which in turn has led to expansion of
services trade in terms of both the types being traded and their geographical reach,through off-shoring. There has also been a global trend toward liberalizing service
sectors, often beyond what countries had commied to in the General Agreement
on Trade in Services.4 Liberalization has also been done in the context of bilateral
and regional free trade agreements whose coverage addresses various aspects of
services trade.
Trade in services has been growing at 15 percent a year since 1980, bringing global
services trade to an average of 12 percent of GDP for low-, middle-, and high-income
countries (Caaneo et al. 2010). For example, in 1986 only 6 percent of services value
added in the worlds economy was exported, but as more services became tradable, by
2008 this share had risen above 10 percent (Mishra et al. 2011). Today, half of global for-eign direct investment is going to services sectors.
Significance of CEFTA Trade in Services
As elsewhere, trade in services has been gaining in importance in the CEFTA region,
where service exports brought in, on average, EUR 16 billion a year for 200709 and
accounted for some 10 percent of GDP in the noncoastal countries, 19 percent in Albania,
and over 23 percent in Croatia and Montenegro, which both have significant tourism
receipts (about 70 percent of total service exports). The average ratio of servicesimports
to GDP is about 10 percent, with Albania (18 percent) at the extreme high end and BiH(5 percent) the extreme low end (see Figure 2.2). Thus services trade is relatively well-
developed in the CEFTA region: the EUs exports and imports as a share of GDP are
just below 10 percent, which is similar to CEFTAs (excluding tourism receipts). In some
Figure 2.1. Average share of service sectors in CEFTA economies
Source:National statistics offices.Note:Kosovo data are available only for 200507.
0
10
20
30
40
50
60
70
8090
100
Albania BiH Croatia Kosovo Macedonia Montenegro Serbia
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Barriers to Trade in Services in the CEFTA Region 5
Table 2.1. Shares in the national economy of the top four sectors by country
2007 2008 2009
Albania
Trade (incl. hotels and restaurants) 22.2 22.1 22.2
Construction 15.5 15.6 14.8
Transport 5.7 5.6 5.6
Post and telecommunications 4.5 4.5 4.6
BiH
Wholesale and retail trade 15.6 16.4 15.7
Real estate and business services 11.2 10.2 10.8
Transport 8.7 8.3 8.3
Construction 6.1 6.7 6.4
Croatia
Financial and real estate 22.9 22.9 24.4
Wholesale and retail trade 12.7 12.2 10.9
Transport 9.1 8.6 8.3
Construction 7.7 8.3 8.0
FYR Macedonia
Wholesale and retail trade 15.1 14.1 15.0
Transport 9.3 9.3 9.0
Construction 6.6 5.7 5.9
Real estate and business services 4.1 4.9 4.9
Montenegro
Wholesale and retail trade 16.8 15.4 14.4
Transport 11.2 11.7 11.5
Real estate and business services 12.0 10.2 10.1
Construction 7.3 7.7 6.5
Serbia
Real estate 18.2 18.5 19.0 Wholesale and retail trade 12.7 13.4 13.1
Transport 8.9 8.9 10.1
Construction 5.2 5.6 5.2
Kosovo 2005 2006 2007
Real estate and business services 14.8 14.9 14.9
Wholesale and retail trade 11.8 11.9 11.4
Construction 9.7 10.4 12.0
Transport 4.8 5.3 4.3
Source:National statistics offices.
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The scope of activities that comprise services is defined in the General Agreement on Trade in Services
(GATS) of the World Trade Organization. In contrast to traded goods, services are often intangible, invis-
ible, or perishable, and usually require simultaneous production and consumption. The GATS takes a wideview of trade in services, which is defined to include four modes of supply based on where the service sup-
plier is present. Table B1.1 presents the four modes of supply and for each mode gives sector examples.
Box 2.1. Modes of Supply and Examples of Services
Table 2.2. Modes of cross-border supply of services
Presence of Supplier Other Criteria Mode
Examples of Sector
Relevance
Service supplier is not
present in the territory
of the member
Service supplied in the
territory of one member
from the territory of another
Cross-border supply
[Mode 1]
Accounting, engineering,
health, ICT, and legal
services
Service supplied to a
consumer of memberoutsidehis or her territory,
in the territory of another
member
Consumption abroad
[Mode 2]
Tourism and health and
legal services
Service supplier is
present in the territory
of member
Service supplied in the
territory of one member
through the presence of
the commercial supplier
from another
Commercial presence
[Mode 3]
Accounting, construction,
distribution, engineering,
environmental, health, ICT,
and legal services
Service supplied inthe
territory of member by
supplier from another
member who is present asa natural person
Movement of natural
persons [Mode 4]
Accounting, construction,
engineering, environmental,
health, ICT, and legal
services
Source:Caaneo et al. 2010.
EU-10 countries, however, service exports have reached close to 15 percent of GDP,
which is higher than not only CEFTA but also the world average.5
In most countries growth in services exports has surpassed growth in goods exports.
In the past decade in Croatia, for example, while goods exports have not even doubled,
services exports have almost quadrupled (led mostly by tourism). Up to the global eco-
nomic crisis growth in services exports was outpacing growth in goods exports in most
CEFTA countries (see Table 2.3). In 2008, only in BiH and Kosovo did goods exports rise
faster than exports of services. The global crisis proved that export of services was much
the more resilient: the decline in services exports from 2008 to 2009 was much lower
than in goods exports, and two countries even managed to maintain growth in service
exports.
The Structure of CEFTAs Services Exports
The structure of trade in services varies across the region. The main distinction has to dowith the role of tourism (see Table 2.4).
Travel(tourism receipts) is the major source of inflows for countries on the Adriatic
coast, accounting for about 70 percent of total service exports for Albania, Croatia, and
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Barriers to Trade in Services in the CEFTA Region 7
Source:National authorities (central banks) and Eurostat.
Figure 2.2. Services trade in CEFTA and the EU, 200709 average
(percent of GDP)
100
0
155
5
20 25
Serbia
Kosovo
Macedonia
BiH
Albania
Croatia
Montenegro
Exports Imports
10 15 20 25
Slovakia
EU-27
Lithuania
Slovenia
Bulgaria
Hungary
Latvia
Exports Imports
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Table 2.3. Change in exports of goods and services (percent)
2008 2009
Goods Services Goods Services
Albania 16.7 19.3 18.1 1.8
BiH 13.9 6.0 17.1 10.9
Croatia 6.8 10.7 21.5 16.2
Kosovo 22.7 5.7 25.2 21.8
Macedonia, FYR 8.9 15.6 28.7 10.2
Montenegro 9.4 11.5 36.6 9.3
Serbia 15.5 19.0 19.8 8.8
Source:National authorities (central banks) and IMF.
Figure 2.3. Exports of goods and services, 200709 average (EUR) million
Source:National authorities (central banks) and IMF.
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Alba
nia
BiH
Croatia
Kosovo
Macedo
nia,FYR
Monte
negro
Serbia
9,000
10,000
Goods
Services
Montenegro, and 50 percent for BiH. The share in land-locked FYR Macedonia and Serbia
was 25 percent. The region received EUR 9.6 billion in tourism receipts in 2009, two-thirds
of which went to Croatia.
Transportis the most important traded service after tourism: CEFTA receipts have
averaged about EUR 2.2 billion a year in recent years. Inflows from transport services
represent 31 percent of nontourism service exports in Serbia and 44 percent in Croatia,
reflecting both the competitiveness of their transport companies and their importance as
transit countries. Only in Kosovo are exports of transport services less important; there
transit is negligible, given the political problems that Kosovos transport companies face
(e.g., non recognition of license plates by some neighbors and EU countries) and the
closed border to the north.
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Barriers to Trade in Services in the CEFTA Region 9
Table 2.4. Structure of service exports, 200709 average (EUR, million)
Albania BiH Croatia Kosovo Macedonia Montenegro Serbia
Total service exports 1,607 1,063 9,214 376 656 701 2,515
Travel 1,158 525 6,864 145 156 483 629
Transportation 146 212 1,042 30 202 88 567
Communications
services
81 95 204 54 58 29 88
Construction services 15 155 93 8 38 42 184
Insurance services 4 8 22 13 6 2 18
Financial services 27 2 37 3 3 4 22
Computer and
information services
7 n/a 102 2 30 3 86
Merchanting and other
trade-related services
n/a n/a 97 n/a 25 9 59
Misc. professional and
technical services
n/a n/a 636 n/a 105 28 528
Personal, cultural, and
recreational services
28 n/a 68 1 13 10 105
Government services,
not included elsewhere.
34 3 0 98 13 0 16
Other services 108 64 48 22 6 2 212
Source:National authorities (central banks).Note:Data for FYR Macedonia are for 200809.
Communication services are the third largest export category; together with com-puter and information services, they brought the region about EUR 850 million a year for
200709. Constructionfollowed with some EUR 500 million a year. The general category of
miscellaneous professional, business and trade-related services (legal, consulting, archi-
tectural, accounting and other services) accounted for over EUR 1.3 billion annually, but
subsector data are not available to assess which areas were most important. The volume of
trade infinancialand insuranceservices has been relatively small, less than EUR 200 million
in exports annually.
Overall, the CEFTA region is a large net exporter of services, but once tourism is taken
out trade seems to be balanced. Total services exports (EUR 16.1 billion) were almost dou-
ble imports (EUR 8.7 billion) for 200709. Tourism inflows are responsible for the surplus.Once tourism receipts and outflows are excluded, services exports (EUR 6.2 billion) were
only slightly higher than imports (EUR 5.9 billion). BiH is the only CEFTA country with
significant net exports due primarily to exports of construction services. Croatias exports
are slightly higher than imports; Kosovo and Serbia have balanced trade; and the rest are
by a small margin net importers.
Intra-CEFTA Trade in Services
Trade in services within CEFTA is difficult to assess because of data limitations. Sta-
tistics on service exports and imports by country are available only for Croatia, Mon-tenegro, and Serbia, and then only with limitations. For instance, Croatia does not
collect data on tourism receipts by country of origin, even though tourism is its most
important source of export revenues, and Serbias service trade statistics by country of
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Figure 2.4. Net trade in services by country, 200709 average
(EUR million)
Source:National authorities (central banks).
-1,0002,0003,0004,0005,0006,0007,0008,0009,000
10,000
Total exports Total imports
-
500
1,000
1,500
2,000
2,500
Exports, excluding travel Imports, excluding travel
Alba
nia BiH
Croatia
Kosovo
Maced
onia
Monte
negro
Serbia
A
lbania Bi
H
C
roatia
K
osovo
Maced
onia
Monten
egro
Serbia
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Barriers to Trade in Services in the CEFTA Region 11
Table 2.5. Share of exports withinCEFTA in total exports, 2008 (percent)
Goods Services
Croatia 23.0 12.9
Montenegro 34.0 26.6
Serbia 33.1 13.9
Source:Handjiski et at. (2010) and nationalauthorities.
origin are less disaggregated than overall ser-
vice trade statistics (data are not available for
ICT, insurance, government services, etc.).
The other CEFTA members do not collect data
on their own services trade.The data available suggest that services
exports within the region have been significant:
Croatias service exports to the region averaged
EUR 286 million a year between 2007 and
2009, and Serbias were EUR 261 million, plus
EUR 36 million in tourism receipts. Montenegros exports were expectedly more mod-
est, at EUR 58 million a year, though, in addition, Montenegro has considerable tourism
receipts from the CEFTA countries (estimated at about EUR 270 million a year).
In relative terms, though, intraregional trade in services seems to be less than trade
in goods. The share of trade in goods is significantly greater for Serbia and Croatia andto a lesser extent Montenegro (see Table 2.5).
Transport is the most traded service, accounting for over 40 percent of trade
within the region for Croatia and Montenegro and 28 percent for Serbia. This is to be
expected given both sizable merchandise trade in the region and the large amounts
of goods in transit to European and other markets that in crossing the two countries
pay fees to road and rail providers. Montenegros statistics by mode of transport show
maritime transport gaining importance, given the growth in the Port of Bar, which serves
other CEFTA countries, over road and rail. Data by mode of transport are not available
for Croatia and Serbia.
Constructionis the second most important services sector, accounting for 15 percent inSerbia, 12 percent in Montenegro, and 6 percent in Croatia. In Serbia exports of construc-
tion services rose from EUR 29 million in 2007 to EUR 53 million in 2009. Construction is
also important for FYR Macedonian companies, although precise data are not available.
Miscellaneous business, professional, and technicalservices account for over 25 percent
of total intraregional exports for Croatia and Serbia and 15 percent for Montenegro. For
Croatia, the only country that collects trade data by subsector, architectural and engineer-
ing services are the largest sub segment (EUR 35 million in annual exports), followed by
legal, consulting and accounting services (EUR 24 million), and advertising and market
research (EUR 10 million). For computer and informationservices, Croatia recorded EUR
18 million of annual exports, compared to less than EUR 1 million for Montenegro; Serbiadoes not have regional trade data for this sector.
On the import side, the same sectors dominate intraregional trade: Transport has the
largest share (2745 percent), followed by construction (926 percent), and miscellaneous
services (2135 percent). Montenegros statistics by mode reveal that air transport is most
important (almost half of all transport imports) followed by road. Of Croatias imports of
miscellaneous services from CEFTA, 60 percent was advertising and market research and
another 25 percent architectural and engineering services.
Overall, within CEFTA Croatia and Serbia are net exporters of nontourism services
and Montenegro is a net importer. Croatia is a large net exporter of transport and ICT ser-
vices and a net importer of construction services. Serbia, on the other hand, records a sur-plus in construction services trade and in miscellaneous professional services but is a net
importer of transport services. Finally, Montenegros intraregional trade balance shows a
deficit across all service sectors except communication and trade-related services.
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Figure 2.5. Trade in services within the CEFTA Region, 200709
average, (EUR, millions)
Source:National authorities (central banks).Note:Tourism receipts not included.
0
50
100
150
200
250
300
Croatia
Exports
100
150
200
250
300
Imports
0
50
Other services
Misc. professional, andtechnical services
Merchanting and other
trade-related services
Computer and information
services
Insurance services
Construction services
Communications services
Transportation
SerbiaMontenegro
Croatia SerbiaMontenegro
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Barriers to Trade in Services in the CEFTA Region 13
Box 2.2. Quality of CEFTA Service Trade Statistics
In most countries statistics on trade in services are scarce and imprecise, in part because services are non
tangible, which can make them difcult to capture. This is particularly true of the CEFTA countries. Handjiski
et al. (2010, pp. 1821) have pointed out the concerns about the quality of merchandise trade statistics,noting considerable gaps in mirror statistics between several country pairs.
However, the limited data available on service trade by country and sector do show that recording of service
trade seems to be adequate. Mirror statistics for Croatia and Serbia (Figure 2.6) show almost a complete
match for most sectors. The only signicant exception is that less than 50 percent of Serbias construction
exports are captured in Croatias import statistics.
Figure 2.6. Mirror gap trade statistics for Croatia and Serbia, 2009
(EUR million)
10 150 5 20
Transportation
Communications
Construction
Misc. prof., and tech.
Other
Croatia's imports Serbia's exports
- 10.0 20.0 30.0 40.0 50.0 60.0
Transportation
Communications
Construction
Misc. prof., and tech.
Other
Serbia's imports Croatia's exports
Source:National authorities (central banks).
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Notes
1. The link between GVA and GDP can be defined as follows: GDP (at current market prices) equals
GVA (at current basic prices) plus taxes on products less product subsidies.
2. Nontradablehere refers to services that require local presence. Of course, such services could be
traded through mode 3 (for discussion of the modes, see Box 1).3. Sectoral data on value added are not necessarily comparable because there are different report-
ing standards and classifications of sectors.
4.The General Agreement on Trade in Services (GATS) is a WTO treaty that entered into force in
January 1995.
5. The quality and comparability of CEFTA national accounts statistics region are sometimes ques-
tionable because of the quantity of informal activity; all discussions based on GDP shares need to
be viewed with caution.
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15
3
Barriers to Trade in Services by Sector1
General Market Access and Barriers
Over the past decade CEFTA countries have made great progress in opening both goodsand services markets to foreign competition and investment, a result partly of GATScommitments made during WTO negotiations and partly of pursuing EU membership.All potential candidates for EU membership sign Stabilization and Association Agreements
with the EU that include liberalization of services sectors. Moreover, as part of the EU
accession process CEFTA countries have signed regional treaties aimed at opening
and integrating markets in several sectors within the region and the EU, among them
treaties related to aviation and energy. A regional treaty is also being negotiated for
railway transport.
The next section reviews progress in liberalization and the barriers to trade in
services that remain, and the following sections look at specific barriers in four sectors.
The assessments are done in terms of aspects identified by Caaneo et al. (2010): market
access, commercial presence and ownership, performance requirements, transparencyand protection of rights, and movement of natural persons.
In terms of market access,for most services (except, e.g., for some transport and legal
services), no CEFTA country has legal restrictions on foreign firms establishing a com-
mercial presence, and once established, foreign-owned firms are subject to the same
nondiscriminatory rules as domestic firms. The OECD Investment Reform Index (IRI)
2010 confirms that CEFTA countries have made considerable progress in adopting the
principle of national treatment and have not added any restrictions in the last four years.
It also notes that SEE economies do not use trans-sectoral screening for foreign investment.
In this context, the CEFTA agreement does not contain provisions on aspects of the quality
of the regulatory processes (which can sometimes aff
ect market access), though thereis a provision (article 31) that commits parties to create and maintain stable, favorable
and transparent conditions for investors of the other Parties and to grant the necessary
permits and administrative authorizations in connection with investments.
Concerning commercial presence and ownership, foreign-owned local firms seem to be
free to determine their ownership structure (up to 100 percent foreign ownership allowed)
and whether they will joint venture with local or other foreign-owned firms. Also, the state
has generally pulled out of most service sectors as an owner or monopoly rights holder
(with some differences among the CEFTA countries), so foreign-owned firms compete
with domestic under the same market rules. The one form of restriction that is common
across the region is a 49 percent limitation on foreign ownership in areas related to armsmanufacturing, trade, and production.
Performance requirements, such as local content requirements, have mostly been
removed (OECD 2010). WTO members in the region must adhere to the Agreement on
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Trade Related Investment Measures (TRIMS). BiH, Montenegro, and Serbia are in the
process of acceding to the WTO and have made commitments not to apply performance
requirements inconsistent with TRIMS. Though not in the WTO accession process, Kosovo
also does not impose requirements prohibited by TRIMS.
Limitations like citizenship requirements for managers, board members, andemployees have also generally been removed. Foreign-owned firms are free to use their
original names and logos (with some minimal additional requirements, e.g., when the
alphabet is different) and can fully repatriate their profits. Last but not least, once locally
established, foreign firms may join professional bodies and industry associations.
Legal systems in CEFTA members have also advanced significantly in terms of trans-
parency and protection of the rights of foreign-owned firms.All CEFTA countries publish
laws and implementing regulations in official gazees and on the websites of the agen-
cies responsible. The high degree of transparency is confirmed by the IRI (OECD 2010).
When dealing with the state, foreign-owned firms follow the same procedures for legal
and institutional recourse as domesticfirms. For example, foreign-ownedfirms may appealadministrative decisions through several levels.
However, in many CEFTA countries court procedures for enforcing contracts can be
very lengthy and costly and discourage foreign firms from providing services. Interviews
with construction firms revealed a reluctance to geing involved with private parties
because of possible problems with collecting payment. If firms do end up in court, it
typically takes more than a year to enforce a contract (World Bank 2011); up to 60 percent
of the contract value may be lost in the process.
One aspect of the legal system that maers to foreign firms is the possibility of
arbitrating commercial disputes. Modern laws and institutions provide flexible choices
for commercial dispute resolution. All CEFTA countries have introduced some sort
of alternative dispute resolution,2 though their use and effectiveness varies greatly by
country. Serbian courts are fairly efficient at enforcing arbitration awards, taking only
6 weeks for a domestic award and 11 weeks for a foreign award. In Montenegro, on the
other hand, enforcement takes 45 weeks.
Figure 3.1. Time and cost of enforcing a contract
Source:World Bank 2011.
-
10
20
30
40
50
60
70
0
100
200
300
400
500
600
700
Time, in days (left scale) Cost, as % of debt (right scale)
Alba
nia BiH
Croa
tia
Kosovo
Maced
onia
Mon
tene
gro
Serbia
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Barriers to Trade in Services in the CEFTA Region 17
Also, competition policy and enforcement of its legal provisions are important in
expanding trade in services. The CEFTA countries have adopted competition laws in
compliance with EU rules and most of them have established independent competi-
tion authorities (Kathuria, 2008), though progress in implementation of these laws varies
across countries. As a maer of fact, the poor enforcement track-record in terms of cases
investigated and volumes offines collected indicates that capacity building for competitionis still needed. Kathuria (2008) recommends that given the small size of these countries,
it might be useful to contemplate the establishment of multiregulators or certain regional-
level regulatory structures. The CEFTA agreement does not contain any provisions
along those lines but it does oblige the signatory parties (in articles 19 and 20) to apply
the principles of the competition rules applicable in the EU3. Indeed in the case of the EU,
competition provisions and their enforcement have been very important in expanding
intra-EU trade in services.
Movement of natural persons(supply mode 4; see Box 2.1) is the most restricted mode of
supply. None of the CEFTA countries offer freedom of employment; citizens of CEFTA
members, like those of other countries, need to obtain authorization before beginning towork. Procedures for doing this tend to be cumbersome and lengthy. Unfortunately, no
data on how long this process takes are available, but anecdotal evidence shows that
foreign companies face major challenges to obtain work authorizations for their foreign
workers. According to an interview with one law firm, even managers of large foreign
companies sometimes need to wait for a year to obtain a work authorization. Moreover,
countries often have quotas on foreign workers, and decisions about whether employing
a foreign worker is economically justified are often arbitrary.
Some CEFTA countries also do not give temporary-entry privileges to foreign
workers to execute a short-term service contract (e.g., construction workers coming
in for several weeks or months). This is of particular relevance to trade in services.Kosovo has the most liberal approach: several types of foreign workers are fully exempt
from the work authorization process. Albania, FYR Macedonia, and Montenegro have
special categories for temporary work permits that, among other things, do not impose
Table 3.1. Arbitrating commercial disputes
Strength of
laws index
Ease of
arbitration index
Extent of judicial
assistance index
Time to enforce
domestic award
(weeks)
Time to enforce
foreign award
(weeks)
Serbia 95 71 90 6 11
BiH 73 57 76 n/a 13
Albania 84 41 69 14 15
Macedonia, FYR 93 75 70 15 34
Montenegro 64 60 47 45 45
Croatia 93 71 53 26 48
Kosovo 75 64 28 n/a n/a
Source:Investment Across Borders 2010.Note:The strength of laws index(0100) analyzes both legal frameworks for alternative dispute resolu-tion and adherence to the main international conventions related to international arbitration. The ease
of arbitration process indexassesses whether disputing parties face restrictions or other obstacles inseeking to resolve their dispute; the extent of judicial assistance indexmeasures interaction betweendomestic courts and arbitral tribunals, including the willingness of courts to assist during the arbitrationprocess and how effectively they enforce arbitration awards.
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a residency requirement. BiH, Croatia, and Serbiathe largest CEFTA economiesdo not
offer temporary-work privileges, and obtaining a work authorization is tedious even for
short-term engagements in the country.A second aspect of the movement of natural persons is recognition of professional
skills and diplomas.Even if, for example, it were possible to work in Montenegro with
limited or no work authorization formalities, Croatian citizens would not be able to take
up employment in a number of service sectors (such as health, construction, and legal)
unless Montenegro recognized their diplomas. Though not relevant for services like ICT
services and tourism, recognition of skills is highly relevant for construction, health,
and some other services. The challenges related to skill recognition are discussed in the
sectoral analysis.
Moving toward the EU
Since all CEFTA countries aspire to join the EU, trade in services will ultimately need
to be liberalized to the level of the EU common market. Further integration of CEFTA
services markets would have a positive economic impact, direct and indirect, and would
Table 3.2. Work authorizations in CEFTA countries
Type of work authorizations
Quotas
on foreign
labor
Economic
needs test
Temporary
transfers
Residency
requirement for
short-term stay
Albania Several types of work authorizations:work permit for employees, seasonal
workers, inter-company transfer
employees, students, cross-
borderwork, family members, students
and vocational training
No No Yes No
BiH Work permit (for business owners)
or operating license (for employees,
including managers)
Yes Yes No Yes
Croatia Work permit (for business owners)
or operating license (for employees,
including managers)
Yes Yes No Yes
Kosovo Work permit, but several categoriesexempted from obtaining work
authorization: executive directors,
intra-company transfer employees,
people involved in cross-border
transport, academic staff, etc.
No Yes Yes No
Macedonia,
FYR
Personal work permit, license for
employment, or work permit (for
seasonal work, cross-border service
provision, vocational training, and
contractual services
Yes No Yes No
Montenegro Personal work permit, license for
employment, or work permit (forseasonal work, cross-border service
provision, vocational training, and
contractual services
Yes No Yes No
Serbia Standard work permit, no sub-
categories
No No No Yes
Source:Authors.
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Barriers to Trade in Services in the CEFTA Region 19
help member countries prepare for joining the EU. Currently their legal systems contain
restrictions on foreign entry which are incompatible with EU legislation.
Opening up services markets for intra-EU competition has been a long-standing
objective and challenge for the European Commission (EC). EU policy makers have long
been aware that their economies do not benefit fully from otherwise very developedservice sectors because they are fragmented. The Directive on Services in the Internal
Market adopted in December 2006 by the European Council and Parliament, which
entered into force before 2010, states that elimination of barriers to the development of
service activities between Member States is essential in order to strengthen the integra-
tion of the peoples of Europe and to promote balanced and sustainable economic and
social progress.
The Services Directive requires EU states to simplify procedures and remove barriers
to cross-border service provision. The cornerstone is the country of origin principle,
which means that a company offering its services in another EU country would operate
according to the regulations of its home country. It also requires EU Member States toabolish discriminatory requirements, such as those related to nationality or residence;
economic needs tests (requiring businesses to prove demand for their services);
or requirements for a minimum number of employees.
Service providers benefit from simplified procedures and formalities when estab-
lishing a business in another EU country or supplying services across borders to another
Member State, since it is no longer necessary to set up an establishment there. However,
Member States must set up points of single contact through which service providers
can obtain information and deal electronically with all administrative formalitiesphysical
presence is not required. Consumers of services, both individuals and businesses, benefit
from a wider selection of suppliers, improved standards for services delivery, and beerconsumer protection.
The Services Directive, however, excludes a number of sectors: (a) financial services,
(b) electronic communications services, (c) most transport services, (e) health care,
(f) temporary work agencies, (g) private security services, (h) audiovisual services,
(i) gambling, (j) certain social services provided by the state, and (k) services provided
by notaries and bailiffs, though some of these, such as the first two, are covered by other
EC legislation.
Sectoral Barriers to Trade in Services
The following sections describe market-entry barriers in four sectors found to be ofrelevance for CEFTA countries: transport, construction, ICT, and legal services. The sec-
tors were selected for one or more of the following reasons: (a) size and trade potential,
(b) sector priorities for liberalization announced by CEFTA countries, and (c) significant
current barriers to entry.
The sections will assess regulatory differences between countries for each sector,
focusing on the barriers to cross-border provision. The analysis of barriers covers the
following aspects: (a) market access, including cross-border supply; (b) foreign owner-
ship and commercial presence; and (c) regulation and licensing.
Construction
Trade in construction services is of great relevance for many CEFTA countries because
of booming real estate and infrastructure investments and a long tradition of exporting
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construction services. Over the last decade investment in transport, energy, and other
infrastructure and in real estate has grown faster than average economic growth in
the region.4The countries with the largest investment programs are often importers of
construction services, but several CEFTA countries have traditionally been exporters;
FYR Macedonian and Serbian companies can be found among the top 225 internationalconstruction contractors (Caaneo et al. 2010). Some of these companies have in recent
years achieved remarkable growth. For example, FYR Macedonias exports of construc-
tion services increased sevenfold in only three years, peaking in 2005, and BiHs exports
more than tripled between 2002 and 2007. Construction trade relationships among these
countries are not new: several large regional construction companies were established
in the former Yugoslavia and operated across national borders, as they are again doing.
The benefits of cross-border provision of construction services are multiple. In
countries with large investment programs, foreign presence can fill a domestic capacity
gap. When complex projects are being designed and built, established foreign firms
bring in new know-how and technologies, which are adapted and adopted by domesticfirms. Large foreign firms sometimes also offer a more innovative and deeper selection
of financial resources. Finally, competition puts pressure on domestic contractors to be
more productive while offering the potential for partnering with foreign companies both
domestically and abroad.
Construction services are provided mostly through commercial presence (mode 3),5
as when, for example, a Serbian company establishes a subsidiary in Montenegro to
provide services locally; and temporary movement of personnel (mode 4), as when an
FYR Macedonian company takes workers to BiH to build a factory or a road. Related
services, such as architecture and engineering,6are often provided through mode 4
(e.g., a Croatian architect goes to Serbia to design a project) or mode 1 (a Croatian architectin Zagreb designs a project and sends it to the Serbian client).
Despite well-developed regional trade links, construction firms face a number of
barriers to entry into CEFTA markets with respect to both market access and presence,
though these vary by country (Table 9) at the end of this section summarizes the barriers
in this sector). Only BiH allows for cross-border provisionof construction services; at the
same time, it also used to be the only CEFTA country that required investment approval
from the Ministry of Foreign Trade and Economic Relations for foreign companies, but
that was abolished by a 2010 law. All other CEFTA countries require foreign companies
to establish a local presence, and most set limitations on the type of presence, requiring
that a local company be establishedbranch or representative offices may not provideconstruction services. In some CEFTA countries, starting a business by a foreign com-
pany is fairly fast (7 days in Albania, 8 in FYR Macedonia), but the process is torturously
bureaucratic in BiH and Kosovo, taking more than 80 days (World Bank 2010c). In all
other countries starting a foreign business does not require much additional time and
effort; the only burden relative to local investors is that foreign investors need to authen-
ticate the documents of the parent company abroad.
Once the foreign company has established a local presence that local company needs
to obtain the relevant licenses to provide construction services. The only exception is
BiH, which allows foreign companies to provide construction services and requires only
that they be appropriately licensed in their home country and meet BiH requirements fornumber of staffand competencies of key employees. The licensing process differs from
country to country: in FYR Macedonia and Montenegro, foreign companies can ask to
have licenses from their home country recognized; in all other CEFTA countries foreign
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firms go through the same procedure as domestic firms. However, how easy this is
differs by country. Recognition in FYR Macedonia, for example, is done by the Chamber
of Authorized Architects and Engineers, which has to confirm that the license of the
foreign firm corresponds to Macedonian legal requirements.
Requirements and types of licenses vary considerably. In BiH, for example, the licens-ing requirements specify the number of qualified employees and possession of appropriate
equipment (depending on the type of license). In FYR Macedonia, a construction com-
pany needs between 2 employees (for the lowest license type) and 30 (for the highest), as
well as licensed professional staff(engineers). Croatias requirements are much stricter:
a construction company needs 300 employees, of which 10 are licensed professionals,
to qualify for the highest license type, which allows it to perform public construction
work with a value of EUR 7 million or more. In Albania and Kosovo, on the other hand,
to perform construction services a company needs only a certified technical director.
The procedure for licensing a construction company is fairly streamlined throughout the
region: it typically takes no more than two months and licenses are effective for four toseven years.
One requirement for obtaining a construction license concerns the qualifications of
key personnel (for example, an employee with an architectural and engineering design
license, or licensed building and supervisory engineers). If the foreign company wishes
to bring professional workers from its home country to the local subsidiary, their profes-
sional qualifications will not be accepted; they must certify their diplomas or apply in
the recipient country for the same licenses they hold at home. Again, the complexity of
the process varies: Kosovo, for instance, recognizes foreign licenses while in Croatia a
Serbian engineer will have to have the Serbian diploma aested and then secure a license
from the Croatian Chamber of Architects and Engineers.Foreign companies need to obtain work authorizations (see Table 3.2) for foreign
employees they plan to bring in. The limitations in each CEFTA country on temporary
movement of workers for all sectors can be a particularly serious impediment for
construction, which is labor-intensive and often requires high short-term circulation
of professional staff (architects, welders, builders, crane operators, etc.). It may also
involve transfer of a large number of low-skill construction workers for short periods
(e.g., 13 months). Obtaining work authorizations in both cases can be so lengthy and
tedious that they cause delays and increase costs. FYR Macedonia is the only country
that has a distinct work permit with streamlined procedures for temporary and seasonal
workers. In Albania, even though the legislation does not provide for a similar workpermit, the contractor for a large highway project (Bechtel-Enka) was able to reach agree-
ment with the government to facilitate issuance of work permits for foreign workers.
Labor mobility is a highly sensitive political issue, but several countries have moved
to recognize qualifications. Albania and FYR Macedonia have agreed to mutual recogni-
tion. For construction work BiH accepts diplomas obtained before 1993 in the former
Yugoslavia and foreign licenses. In FYR Macedonia, the Chamber of Authorized Archi-
tects and Engineers verifies foreign licenses. Serbia also accepts diplomas from former
Yugoslavia and recognizes construction work licenses based on reciprocity.
Domestic Regulation and Cross-border Provision
Barriers to greater trade in construction services are not limited to entry and establishing
local presence. Domestic nondiscriminatory regulations that apply to all companies
can have disproportionately higher impact on foreign-owned companies. Typically,
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construction is highly regulated, and differences in regulation make it more costly forfirms to enter foreign markets. For example, in the CEFTA region there can be large vari-
ations in technical standards and regulations. In some countries, standards are enforced
by ministries of physical and spatial planning; in othersfirms also have to deal with local
authorities. Technical standards and building codes in some countries, like Croatia, are
aligned with EU standards, but in others are less harmonized with EU or other interna-
tional standards (although all CEFTA countries are now reinforcing and harmonizing
their design and construction standards for roads). As a result, construction companies
have to learn and apply different technical standards in each country. Converging to
common European standards would reduce transaction costs and ease the entry of local
companies into foreign markets.Dealing with construction permits may also disproportionately affect foreign con-
struction firms. In all CEFTA countries procedures for obtaining construction permits
are cumbersome. Doing Business 2011 shows that even the best performer in this area,
Croatia, ranks only 132nd on a global scale. When licensing requirements are complex,
factors beyond the legal requirements determine the outcome of the process and its
speed. Where personal relationships with public officials could ease the process, foreign
firms are clearly disadvantaged.
Restrictions on ownership of land and other real estate may apply to all sectors but
have more impact on construction companiesa relevant factor when foreign real estate
developers are interested in investing. All CEFTA countries allow foreign and foreign-owned firms to own developed real estate, but ownership of nonagricultural land is
more restricted. BiH, Croatia, FYR Macedonia, and Kosovo accept the reciprocity principle.
Albania, Montenegro, and Serbia in principle do not restrict land ownership by foreigners,
though there may be additional requirements.
Leasing is another option for acquiring land that may can promote or impede
foreign investment, depending on how easy the process is. Investment Across Borders
(World Bank 2010c) shows that acquiring land through leasing can be very simple and
quick or very lengthy, depending on the country and the type of land. For example, it
takes only 13 days to lease land from a private owner in FYR Macedonia but almost
80 days in Croatia. Leasing from the government, as might be expected, takes longer butvaries from less than 60 days in Kosovo to over 180 days in Montenegro.
Finally, the largest client for construction services, in particular cross-border services,
is the public sector. According to Caaneo et al. (2010), public procurement accounts for
Table 3.3. Ease of obtaining construction permits
Procedures
(number) Time (days)
Cost
(% of income per capita)
DB 2011
global rank
Croatia 13 315 851 132
Macedonia, FYR 21 146 1,601 136
BiH 16 255 578 139
Montenegro 19 230 1,215 161
Albania 24 331 381 170
Kosovo 21 320 857 172
Serbia 20 279 1,821 176
Source:World Bank, Doing Business 2011.
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half of construction activity in many developing countries, for such activities as civil
engineering projects (roads, railways, airports, dams, and ports), utility infrastructure
(water, sanitation, electricity), and housing. The CEFTA countries have opened up pro-
curement for construction projects by providing a level playing field for domestic and
foreign firms. However, anecdotal evidence suggests that domestic firms are sometimes
favored, though some feel that foreign firms are being favored. Many CEFTA public
infrastructure projects are financed by international institutions, whose procurement
standards often prohibit discrimination between domestic and foreign suppliers.7
The View of Private Construction Firms
In addition to analysis of the laws, several firms in the region were interviewed to get
first-hand knowledge of the barriers they face. As noted, several CEFTA countries have
construction industries with established regional and international presence that date from
the former Yugoslavia. Companies interviewed stated that though the regional market
continues to be important, many bid only on public investments because enforcing con-
tracts (collecting payment) against privatefirms is so risky. However, foreign construction
firms may also havefinancial problems in dealing with the state (e.g., geing VAT refunds).
Construction companies typically set up local firms or branches when entering the
regional market, a fairly low-cost process. Difficulties are mostly related to the transfer of
employees from the home country to another CEFTA country. Sometimes ge
ing engi-neers and other key stafflicensed can be costly and time consuming. Then, firms face limi-
tations on bringing construction workers from their home country. Apart from the work
authorization procedure, companies stated they sometimes face additional hurdles, such
Figure 3.2. Ease of leasing land
Note: The lease rights index is based on (a) the ability of foreign-owned companies to lease land,(b) whether leasing procedures are the same for foreign and domestic companies, (c) whether there is astatutory maximum duration of leases, (d) whether there is a statutory maximum on how much land aforeign-owned company may lease, and (e) the ability of foreign-owned companies to renew, transfer,sublease, subdivide, or mortgage leased land.Source:IAB 2010.
0
20
40
60
80
100
0
20
40
60
80
100
120
140
160
180
200
Time to lease
private land (days)
Time to lease
public land (days)
Strenght of lease
rights index (right
scale)Alba
nia BiH
Croa
tia
Kosovo
Maced
onia
Mon
tene
gro
Serbia
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World Bank Study24
as needing to terminate employment of workers in the parent company in order to employ
them in the foreign subsidiary and then having to do the reverse at the end of the project.
Because construction firms typically apply for public tenders, firms interviewed
perceived protection of domestic industry to be their most difficult hurdle. They claimed
that strict enforcement of the legal requirements is one tool used to protect domesticindustry: countries that are strict in enforcing their own standards can make it difficult for
foreign firms to operate. However, differences in technical standards and regulations are
not perceived to be a major barrier. Information on standards and regulations is trans-
parent and available, so even when standards are different, foreign companies know
from the start what the requirements are.
Table 3.4. Summary table of regulatory approaches to construction inCEFTA countries
Is cross-border
service provisionallowed?
Limitations onlocal presence?
Is license from hostcountry applicable?
Durationof license
Is certification
of diplomasrequired?
Albania No No No, companies have
to obtain license
locally
n/a Yes (Agreement on
mutual recognition
with Macedonia)
BiH (FBiH) Yes No Yes, foreign
companies may
provide services
in FBiH provided
that they have
construction license
in the home country
and the meet FBiHsrequirements on staff
and competencies
4 years Yes, except
diplomas granted
in Socialist Federal
Republic of
Yugoslavia (SFRY)
until 1992
BiH (RS) Yes No No 4 years Yes, except
diplomas granted in
SFRY (until 1992)
and diplomas from
Serbia
Croatia Yes to firms from
WTO member
countries;
reciprocity principle
applied to non-
WTO members
Yes, has to be
local company
(branch)
No n/a Yes, diploma has
to be recognized in
Croatia and license
obtained based
on the recognized
diploma.
Kosovo No Yes, has to be
local company
(branch)
No 5 years Yes
Macedonia,
FYR
No Yes, has to be
local company
(branch)
No 7 years Yes (Agreement on
mutual recognition
with Albania)
Montenegro No Yes, has to be
local company
(branch)
Yes, but foreign-
owned company can
request its license
from host country to
be recognized
5 years Yes
Serbia No Yes, has to be
local company
(branch)
No n/a Yes, except
diplomas granted in
SFRY (until 1992)
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Barriers to Trade in Services in the CEFTA Region 25
Transport
Good functioning transport is crucial for trade in goods and ultimately economic growth.
Lower transport costs and reliable and timely transport make products more competitive,
thus promoting exports. Moreover, the transport sector is often a major employer andcould be an important source of export revenues for this group of countries, given the
volume of freight transiting through their territories.
Land transport comprises rail and road, freight and passenger. This section focuses
on freight transport, particularly for-hire freight services.
Land transport volumes are expected to continue to increase throughout the CEFTA
region as economies recover from the economic crisis which led to a huge, but tempo-
rary, decline in goods exports. Until the crisis began in 2009, land freight transport was
increasing in all CEFTA countries except FYR Macedonia. Historical data on transport
volumes8show the potential for growth (see Table 10). Land freight transport in 2008
for the entire region was only 34 percent higher than in 19909; in fact, in BiH and Serbiavolumes were below 1990 levels.
The structure of land transportation has changed over time. Today the dominant
mode of land transport is roads, which account for about three-fourths of total CEFTA
freight transport (see Table 3.6); in the early 1990s, the share of road transport was just
above 50 percent. The current share is close to that of Western European countries
and is significantly higher than in EU New Member States (Table 11, memo items).
Table 3.6. Share of road transportation in total land freight transport (percent)
1970 1990 2000 2007 2008 2009Average200709
Albania 80.0 66.7 100.0 97.3 97.6 n/a 97.5
BiH 19.0 43.7 75.0 63.2 57.1 61.1 60.5
Croatia 18.6 30.9 37.1 72.9 75.9 77.0 75.3
Macedonia, FYR 57.1 73.3 61.5 88.1 85.1 88.9 87.4
Serbia 36.5 54.4 65.2 59.6 62.5 n/a 61.1
Memo items
CEFTA average 42.2 53.8 67.8 76.2 75.6 75.7
CEEC average10 26.1a 30.5 52.7 61.5b n/a n/a
Western Europe average 66.5a 70.8 76.8 78.5b n/a n/a
Source:ITF, national statistics offices.Notes:aData for 1980; bdata for 2005.
Table 3.5. Total land freight transport (ton-km, billions)
1970 1990 2000 2007 2008 2009
Albania 1.0 1.8 2.2 3.7 4.2 n/a
BiH 4.2 7.1 0.4 1.9 2.1 1.8
Croatia 7.0 9.4 2.9 14.1 14.3 12.0
Macedonia, FYR 1.4 3.0 1.3 6.7 4.7 4.5
Serbia 9.6 15.8 7.3 13.6 13.8 n/a
Source:International Transport Forum, national statistics offices.
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World Bank Study26
Among CEFTA countries, road transportation has the highest share in Albania and
FYR Macedonia.
The World Banks Logistics Performance Index (LPI), which measures six aspects
of the logistics environment including transport services, helps to identify areas where
improvements are most needed. The LPI is based on a worldwide survey of freight
forwarders and express carriers and on quantitative data on the performance of the
logistics chain. In all aspects CEFTA countries lag behind high-income countries. Thebiggest difference is in the quality of infrastructure and the ease of arranging international
shipments. Overall, the highest ranked CEFTA country is FYR Macedonia (73rd); the
lowest is Montenegro (121st).
Because laws related to cross-border provision of road and railway freight transport
services differ, assessments of the barriers to trade are discussed separately next. The
focus of the assessment is on market access, commercial presence, and regulatory measures
and licensing.
Road Transport
Market accessrules for road transportation in all CEFTA countries, though cumbersome,
generally do not discriminate against foreign-owned companies. Entry is typically regu-
lated by sectoral laws and regulations of implementing bodies that establish technical,
safety, andfinancial requirements. In most countries responsibility lies with the Ministry of
Transport (Ministry of Public Works and Transport in Albania, Ministry of Infrastructure
in Serbia).
Cross-border provision of services is regulated exclusively by bilateral agreements.
Most CEFTA countries have concluded agreements with each other that determine how
many transportation licenses will be granted. The licenses granted depend on
(1) types of transport: bilateral, transit, universal, or for third countries;
(2) types of vehicles: EURO 14 technological and emission standards;(3) duration: permanent or temporary;
(4) type of goods: regular or special (hazardous goods, or when cargo exceeds
national maximum weight limits).
Table 3.7. Logistics performance indicator
Country
LPI
rank
LPI
score
Sub dimension scores
Customs Infrastructure
International
shipments
Logistics
competence
Tracking
and
tracing Timeliness
FYROM 73 2.8 2.6 2.6 2.8 2.8 2.8 3.1
Croatia 74 2.8 2.6 2.4 3.0 2.5 2.8 3.2
Serbia 83 2.7 2.2 2.3 3.4 2.6 2.7 2.8
BiH 87 2.7 2.3 2.2 3.1 2.3 2.7 3.2
Albania 119 2.5 2.1 2.1 2.6 2.4 2.4 3.0
Montenegro 121 2.4 2.2 2.5 2.5 2.3 2.4 2.7
Memo items
CEFTA 2.6 2.3 2.3 2.9 2.5 2.6 3.0
High-income 3.6 3.4 3.6 3.3 3.5 3.7 4.0
Source:World Bank 2010a.
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Barriers to Trade in Services in the CEFTA Region 27
Because most CEFTA countries, pursuing a rather protectionist policy, determine road
freight license quotas based on reciprocity, the degree of liberalization depends primarily
on bilateral relations. Several agreements provide for considerable liberalization and could
be used as examples for other CEFTA countries. For instance, Serbia has significantly lib-
eralized both bilateral and transit transport with BiH, FYR Macedonia, and Montenegro.Similarly, Albania and FYR Macedonia recently agreed on substantial liberalization.
Concerning commercial presence, there are no restrictions on the type of company,
ownership structure, or other aspects of commercial presence (see general assessment
on commercial presence in section 2).
Road freight transport is heavily regulated, and the regulatory measures and licensesin
CEFTA countries are not much different than in the EU. Standards as defined by national
authorities or by professional associations include rules for providing services, minimum
safety requirements for vehicles and trailers, technical standards for truck engines, and
qualifications and maximum work load for truck drivers.
In most CEFTA countries licenses for domestic road transportation are issued for aperiod of five years. Serbia is the only CEFTA country that does not require licenses. In
FYR Macedonia licenses have no time limit, and BiH defines the validity of the license
based on the age of the vehicle. In all countries licenses are not transferable, and selling
one is considered to be a legal offense.
Licenses for international transport are always issued annually, and in most CEFTA
countries obtaining one can be costly and time-consuming. For instance, in Serbia the
licensing process has 12 steps, including submiing documentary proof of business estab-
lishment, structure and qualifications of employees, vehicle capacity and quality, finan-
cial assets (bank guarantee), previous traffic violations, and previous licenses.
Rail Transport
Rail transport has been declining for the last two decades in all CEFTA countries. A
recent World Bank study of rail in SEE and Turkey (World Bank 2011)finds that railway
systems in CEFTA have just half the traffic density and a third of the productivity of
those in the EU; no CEFTA country performs well. The situation is particularly urgent in
FYR Macedonia, Serbia, Montenegro, BiH, and Albania. Croatia and Kosovo are slightly
more productive, though still low compared to EU levels. Overstaffing is the most strik-
ing feature in every country except Croatia. The second most important reason for poor
performance is low traffic density, which is less than a third of the EU average in all
CEFTA countries except Croatia.Rail in the region is also hampered by deteriorated infrastructure due to lack of
investment for close to 20 years. As a result, there are speed restrictions for safety reasons on
numerous sections of the rail network. Electrification ranges from nonexistent in Albania
and Kosovo to 76 percent in BiH (Montenegro has 68 percent, Croatia 36 percent, FYR
Macedonia 33 percent, and Serbia 31 percent).
Improvements in the sector largely depend on restructuring state-owned companies.
Albania, BiH, and Serbia still have vertically integrated, state-owned rail companies
that manage both infrastructure and transport services. Croatia, FYR Macedonia, and
Montenegro have separated infrastructure from transportation. In Kosovo, laws to sepa-
rate infrastructure and transport services have been enacted but not yet implemented.Market accessof foreign rail companies is limited. Even though the law in every CEFTA
country except Kosovo allows private operators, including foreign-owned, to provide
rail transport, a variety of legal and technical barriers make this practically impossible
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except in Croatia and FYR Macedonia. For example, Albania has not yet established
the Commission for Safety Regulations that is mandated to issue licenses to private
operators. Similarly, Serbia does not have the independent rail transport regulator and
safety agency that the Law on Railways specifies. In addition, Serbia and Montenegro
apply the reciprocity principle to countries whose public rail companies seek to operate
in their territory. In contrast, Croatia and FYR Macedonia have not only separated infra-
structure from transport services but have also created the preconditions for private,
including foreign, service provision.
All CEFTA countries except Kosovo